The effects of income windfalls on labour supply and tax compliance: experimental evidence

Abstract

We examine the effect of cash windfalls on the supply of effort and tax compliance in a high stakes, real effort laboratory experiment. Income windfalls have a negative effect on effort, which mirrors existing evidence from the field. Tax compliance on labor income is only marginally affected by windfalls. When windfall income is taxable, we find a positive relationship between windfall size and compliance. We find no evidence that taxpayers switch from one type of evasion to the other as a function of whether windfalls are taxable or not. While compliance levels are lowest among the most productive, there are no differential effects of windfalls on compliance along the productivity dimension.